SBI links home loan interest rates to repo rate: Will borrowers gain?
SBI has decided to link its home loan interest rates to the repo rate. Here's what this means for borrowers.
Home loan borrowers have long criticised the lack of fairness on the part of banks in transmitting RBI’s policy action. The perception is banks are quick to raise interest rates when the central bank hikes policy rates, but drag their feet when it comes to reducing rates when the reverse happens. For example, while the banking regulator reduced repo rate cumulatively by 50 bps in February and April, banks passed on 21 bps to customers. To address such grievances, the banking regulator had, in December, decided to mandate banks to link their new floating-rate retail loans to an external benchmark. However, reluctance of banks to fall in line meant the decision was put off.
“While calculating MCLR, banks have to factor in the cost of deposit, operating cost etc. apart from repo rates. This reduces the transmission of policy rate changes to borrowers,” says Naveen Kukreja, CEO and Co-founder, Paisabazaar.com. In May, SBI decided to link savings and current account deposits of over Rs 1 lakh and cash credit and overdraft advances to repo rate as a precursor to a shift towards external benchmark for new retail floating-rate loans.
SBI’s new bet
The result is the new loan product, which will carry an RLLR (repo-linked lending rate). The product will have a base spread of 2.25% over the repo rate, which is currently at 5.75%. In addition, one will have to shell out an additional 40-55 bps, depending on one’s risk score as assessed by the bank. Those bracketed in RG 1, 2 and 3 groups will be charged 40 bps, while 55 bps spread will be applicable to those in RG 4, 5 and 6.
Move towards external benchmarks
The repo-linked lending rate (RLLR)* is likely to ensure transparency but also see frequent changes.
*Repo rate plus 225 bps | **A premium of 20 bps if the loan-to-value ratio is >= 80%
Clarity is yet to emerge on segregation as per salaried and non-salaried class. A borrower in the first category, looking for a loan of up to Rs 75 lakh will be charged 8.4%, assuming the loan-to-value ratio is less than 80%. If it is more than 80%, a premium of 20 bps will be levied. Those in higher risk groups will have to pay 8.55%for the same offer. The maximum tenure will be 33 years, apart from the two-year moratorium permitted for under-construction properties. Only those who earn more than Rs 6 lakh per annum are eligible. “This makes sense as borrowers need to be prepared to withstand the volatility mid-tenure,” says Amit Tewary, COO, Loantap Financial Technologies. Existing borrowers can switch to this product after paying a conversion fee of 0.25%.
The fine print
While transparency and alacrity in transmission are the bedrocks of the new scheme, the same feature would also work against borrowers during a rising interest rate regime. Rates will go up as soon as RBI increases policy rates. “Volatility will be high. Therefore, borrowers should opt for this product only if they are comfortable with higher and more frequent changes in their home loan rates,” explains Kukreja.
Besides, while the difference between lowest RLLR- and MCLR-linked home loan rates on offer is 15 bps, it does not necessarily mean your interest rate will be 15 bps lower. “A spread could be charged on the basis of your risk scores and other parameters,” says Patel. Typically, interest corners a lion’s share in EMIs in the initial years, with principal dominating the scene towards the end of tenure. “ The new scheme’s EMIs will not be calculated like conventional EMIs. SBI is yet to spell out how this will be operationalised,” says Tewary.
According to SBI, 3% of the outstanding principal amount is to be repaid every year in EMIs and interest to be serviced monthly as and when applied to the account. “We have shared some information on the website for now. Further details will be put out soon,” says Gupta.
It remains to be seen whether SBI’s new scheme will be panacea to existing problems, but industry-watchers believe it’s a positive development for borrowers.